Compensation comeback

More than half of state’s top CEOs got raises in 2010; others were flat

Happy days are here again, at least for many of the CEOs at Virginia’s largest publicly traded companies. While base salaries inched up an average of 2 percent in 2010, some executives, such as Thomas J. Folliard at CarMax, saw pay raises of as much as 17 percent, and many received multimillion dollar bonuses, according to a study done by Equilar Inc., an executive compensation data firm.

Virginia Business commissioned Redwood City, Calif.-based Equilar for its annual look at CEO compensation. Overall, the study showed that the average base salary here for CEOs leading companies with at least $1 billion in annual revenue was $914,564, compared with $888,718 in 2009. The average total compensation, though, jumped by 58 percent to $7.5 million. See Virginia CEO pay report.

The rise in CEO pay mirrors national trends at S&P 500 companies, although the average increase here wasn’t as great. Top execs at S&P 500 firms saw pay climb 5 percent to edge above $1 million, according to a broader national study by Equilar, “2011 CEO Pay Strategies Report.” Overall, total compensation rose 28.2 percent to a median of $9 million.

At any rate, many CEOs did better than U.S. workers, whose average raise in 2010 was forecast at 2.5 percent, according to World at Work, a Washington, D.C.-based trade group.

Salaries remained flat for 12 other executives. One CEO took a salary cut: Albert L. Lord, 65, at SLM Corp. (better known as Sallie Mae), saw his base pay tumble 21 percent to $1.02 million, from $1.29 million in 2009. He did get a bigger bonus, though: $1.5 million in 2010 compared with $950,000 in 2009. (Sallie Mae has recently moved its headquarters to Delaware.)

Three executives had not served two fiscal years at the time of Equilar’s research and hence no comparative compensation data was available. They were Kevin S. Crutchfield at Alpha Natural Resources Inc., Walter P. Havenstein at Science Applications International Corp. and Jay L. Johnson at General Dynamics Corp. (In addition, the compensation of Baxter F. Phillips at Massey Energy Corp. is included on the list, although Phillips stepped down as CEO after Massey’s merger with Alpha in June 2011). Lastly, Richard D. Fairbank at Capital One Financial Corp. — as has been his custom — prefers to forgo a salary in favor of stock options.

A newcomer to this year’s list is Ralph W. Shrader of McLean-based government-consulting firm Booz Allen Hamilton, which debuted on the New York Stock Exchange on Nov. 17, 2010.

Hands down the biggest gainer in base salary was CarMax’s Folliard, 46, whose base salary shot up 17 percent, from $850,000 in 2009 to $993,077 in 2010. The auto sector has been taking a beating, but CarMax has bucked negative trends, including dwindling consumer confidence and higher gas prices, perhaps because more people held on to, or purchased, used cars, as a result of the economic recession. The Richmond-based auto retailer boosted earnings by 18 percent in the second quarter to $2.6 billion.

Another big gainer was George C. Freeman III of Universal Corp. in Richmond. His $775,000 base salary reflects a one-year jump of 15 percent. That’s despite shareholder returns dropping 14 percent as the tobacco industry deals with oversupply and competition from South America, chiefly Brazil.

As was the case nationally, annual bonuses made a comeback here. Virginia’s top execs, on average, received a bonus check of $1.472 million, nearly 21 percent higher than in 2009. Nationally, Equilar says S&P CEOs in 2010 saw their bonuses increase to $2.15, million up 43 percent from $1.5 million the previous year.

A word of caution when analyzing bonuses: Virginia’s overall percentage jump is skewed mainly by unusually large incentive payouts to two executives. Amerigroup Corp.’s James G. Carlson earned a cash incentive of $2.9 million — an eye-popping 263 percent increase — while Mark Ordan at Sunrise Senior Living Inc. reaped a $4.79 million bonus, up 179 percent from the previous year. On the flip side is Carl J. Grivner at XO Holdings, who received no bonus in 2010 after receiving $710,000 the previous year. That helped devalue Grivner’s total pay package by 50 percent, according to Equilar. (Grivner resigned in April after eight years as head of XO).

The average total compensation of $7.5 million in 2010, including salary, cash bonuses, equity and performance-based cash incentives, was nearly $3 million more than the $4.6 million Virginia executives earned in 2009.

Virginia companies are shifting pay elements to include a greater mix of restricted stock and performance-based equity awards tied to hitting corporate targets, says Aaron Boyd, a research analyst with Equilar. All told, Virginia CEOs were given equity awards worth an average value of $6 million.

That phenomenon reflects how corporate pay philosophy continues to evolve, nationally and in Virginia. “The idea is to align the CEOs’ interests with that of the shareholders,” Boyd says.

Paul C. Saville, the 55-year-old head of Reston-based NVR Inc., best illustrates the concept. The residential-construction company approved a 2010 pay package for Saville potentially worth $30.8 million. Of that figure, $29.5 million is in equity awards — most of which are currently “underwater,” meaning the value is lower than on the date they were granted.

Virginia public companies, as do their national counterparts, face a complicated set of challenges stemming from last year’s passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act. The 2,300-page document contains sweeping new rules that will influence how companies establish and justify their executive compensation. Dodd-Frank presents new hurdles for public companies, says Alan A. Nadel, a principal with Buck Consultants, a New York City advisory firm.

The new rules increase the odds that more companies will advocate for shareholders to have a “say on pay” and similar nonbinding vote on executive parachutes. “It doesn’t require boards to follow it legally, but does give them insight into what shareholders are thinking,” in addition to providing heightened scrutiny on pay practices, Nadel says.

Dodd-Frank also enables corporate directors to hire independent compensation advisers, Nadel says. In the past, compensation committees often followed the recommendation of senior management. Another provision concerns “clawbacks” on bonuses and incentive money. That means executives must pay back the cash if the company makes a material accounting restatement to the U.S. Securities and Exchange Commission within a three-year period. “Clawbacks are now broadly required of all companies, and it’s not necessarily because the CEO did something wrong. It could be an inadvertent mistake,” but CEOs still are forced to surrender those bonuses.

Amid this growing emphasis on performance-based pay, though, some titans of industry here snagged substantial paydays in 2010. Michael E. Szymanczyk of Richmond-based Altria Group Inc., the parent company of cigarette maker Philip Morris USA, secured total compensation valued by Equilar at $20.8 million. That is 131 percent higher than the roughly $9 million Szymanczyk collected last year.

Of Szymanczyk’s total, $10.75 million came in the form of a long-term cash award as Altria “achieved financial performance and cost-savings goals across the operating and service companies in the challenging economic, regulatory and competitive environment of the last three years,” according to the company’s proxy statement. Szymanczyk received $1.3 million in salary and a bonus of $3.2 million.

Energy giant Dominion Resources Inc. awarded compensation worth $14.95 million to its 56-year-old chief, Thomas F. Farrell II. That’s a jump of 44 percent from 2009. Farrell’s pay includes $1.2 million in salary, a $2 million bonus, a long-term cash award of $3.8 million and equity awards valued at $7.7 million.

According to Equilar, Capital One Corp.’s top boss, Richard D. Fairbank, 60, collected $14.85 million in total compensation, with nearly all of it ($14.75 million) in stocks and options. In 2009, Fairbank got slightly more than $6 million worth of equity, according to the McLean-based company’s proxy filed in May.

Meanwhile, John A. Luke Jr. of MeadWestvaco Corp. saw his total compensation rise 141 percent to $11.25 million. Nearly $7.7 million of Luke’s compensation came in the form of performance-based equity awards.

After slashing expenses to the bone for two years, U.S. companies began to sense a turnaround in 2010. But the anemic pace of recovery, coupled with the looming specter of Dodd-Frank and a gyrating stock market, means companies aren’t out of the woods yet, Boyd says. Heading into 2011, Virginia’s public companies will focus even more on tying CEO compensation to specific, targeted and objectively measured business results. Considering the recent turmoil in the markets, whether Virginia’s CEOs benefit from equity-based performance incentives — or instead see their total comp values erode next year — is anybody’s guess.